The Capital Advantage: Comparing Returns to Ability in the Labor and Capital Markets

Spencer Bastani, Kristina Karlsson (), Jonas Kolsrud and Daniel Waldenström
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Kristina Karlsson: Department of Economics, Uppsala University

No 1/2024, Working Papers in Economics and Statistics from Linnaeus University, School of Business and Economics, Department of Economics and Statistics

Abstract: Using administrative tax and military records, we show that cognitive ability is more strongly associated with capital income than with labor income. This result holds across intensive and extensive margins, across different income types, and after controlling for education, occupation, inheritance, and parental background. Higher ability individuals save more, are better at selecting high-return stocks, hold more risky assets, and are less likely to live hand-to-mouth. Capital market returns are higher for cognitive ability than for non-cognitive skills, and the difference is stable over time. Rising capital shares, fueled by technological progress, could therefore exacerbate cognitive ability-based economic inequality.

Keywords: Ability; Skills; Labor Earnings; Capital income; Wealth; Taxation (search for similar items in EconPapers)
JEL-codes: D31 G11 H20 J24 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2024-01-15
New Economics Papers: this item is included in nep-lma and nep-neu
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:vxesta:2024_001

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